Equity Securities - Determining The Value Of Rights

Determining The Value of a Right Cum Rights

In order to determine the value of one right before the ex rights date, you must use the cum rights formula. Subtract the subscription price of the right from the market price of the stock. Once the discount (if any) has been determined, divide the discount by the number of rights required to purchase one share plus one. This will determine the value of one right.

Example:

XYZ has 10,000,000 shares of common stock outstanding and is issuing 5,000,000 additional common shares through a rights offering. XYZ is trading in the market place at

$51 per share and the rights have a subscription price of $48 per share. Keep in mind that the stock price reflects the value of the right that is still attached to the stock.

The value of a right is determined as follows:

Stock Price

- Subscription Price

The number of rights required to purchase one share + 1

$51

-$48

$ 3

$3/3 rights = $1

Because each one of the 10,000,000 shares is entitled to receive one right and the company is offering 5,000,000 additional shares, it will require $48, plus two rights, to subscribe to one additional share. The rights agent will handle the name changes when the rights are purchased and sold in the market place.

Determining The Value of a Right Ex Rights

In order to determine the value of one right after the ex rights date, subtract the subscription price of the right from the market price of the stock. Once the discount (if any) has been determined, divide the discount by the number of rights required to purchase one share. This will determine the value of one right. The price of the stock on the ex rights date is adjusted down by the value of the right to reflect the fact that purchasers of the stock will no longer receive the rights.

Example:

XYZ has 10,000,000 shares of common stock outstanding and is issuing 5,000,000 additional common shares through a rights offering. XYZ is trading in the market place at

$50 per share and the rights have a subscription price of $48 per share. The value of a right is determined as follows:

Stock Price

- Subscription price

The number of rights required to purchase one share

$50

-$48

$2

$2/2 rights = $1

Because each one of the 10,000,000 shares is entitled to receive one right and the company is offering 5,000,000 additional shares it will require $48, plus two rights, to subscribe to one additional share.